Keep Calm and Carry On

Investors were caught by surprise by Trump's victory, but it remains to be seen who he names to key cabinet positions, who his key advisors will be, and which of his policy initiatives will move forward and in what form. Much of this is really unknown. It also remains to be seen how Trump will work with the Republican establishment, who he will need, if he's to get any of his proposals through the legislative process. Uncertainties abound, since Trump typically provided very little detail around his policy ideas.

Nonetheless, the U.S. economy is very resilient, and given the rebound in stock prices off last night's lows, so is the market. The initial decline is already abating, as some investors step in to buy the lower prices. A large decline in stock prices seems unlikely to us, at least not without evidence of some irresponsible action that might not occur. Investors should not jump to conclusions. The performance of different sectors is just breathtaking. Companies that export are down, pharma is up, financials are up, and long-term interest rates have reversed course. After long-term Treasury bonds rallied sharply, they are now down sharply. Nonetheless, we will all be waiting with bated breath to see what policies are forthcoming. Fortunately, we seem to be reasonably well positioned for this outcome.

The initial market reaction to Trump's victory was very telling. Investors clearly wanted Clinton to win, partly because investors thought they understood what she would do with policy and were comfortable with that outcome. Trump represented more of a policy unknown. And as the ultimate political outsider, particularly since he campaigned on policy generalities with little policy detail, investors are very uncertain what he will do.

A few broad strokes are probable. Trump argued for infrastructure spending, which should garner fairly broad support, which should be a positive for those kinds of companies. But, how will that be financed? Trump hasn't proposed either tax hikes or spending cuts to pay for such a program. Will Congress accept the spending without the financing? Many Republicans would not be comfortable with such an approach. That is likely why interest rates have surged after the initial knee jerk reaction of investors to buy such bonds and drive yields down. Even with a Republican majority, many Republicans are too fiscally conservative to accept such a proposal without some financing mechanism. Without any doubt, the direction of policy is uncertain. The markets are repricing at lower levels to reflect this heightened level of uncertainty. But it is dangerous to just assume the worst, even as some people fear a Trump Presidency. Until Trump's policies become more explicit, the uncertainty will remain high, so volatility may remain high, but these could prove to be trading opportunities.

These are some initial reactions on our part. We will provide more thoughts over the course of the day.

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